The shakeout in the aerospace industry’s electronic marketplaces,
which began more than a year ago, is expected to continue for the
foreseeable future. The B2B exchanges that have survived the post
dot-com craze, meanwhile, are rapidly introducing new products and
services, in an effort to make themselves more valuable to customers.
Businesses that were created for the sole purpose of facilitating
Web-based transactions between companies have found that B2B (business-to-business)
electronic marketplaces could not generate enough revenue—through
transaction fees—to keep themselves afloat. Many of those
start-up exchanges have gone out of business during the past one
to two years. Others are barely hanging on.
Those B2B marketplaces that have emerged as strong players in defense
and aerospace e-business are those with robust financial backing
from traditional manufacturers and suppliers. Exchanges such as
Exostar and Cordiem—which are owned by established manufacturers
of defense and aerospace products—have changed their business
models and have developed new software and services that offer “value-added”
to customers, instead of merely providing a Web site to conduct
buy-sell transactions.
Many of the aviation-related B2B start-ups that failed, such as
AviationX, Skyfish and AeroV, had been founded on the premise that,
if the prominent buyers in a specific industry bundled their purchasing
power on a single Web site, the sellers would follow. These suppliers,
according to that B2B model, would compete in online auctions, underbidding
one another. Start-up exchanges soon found that, in industries that
are highly regulated such as defense and aerospace, suppliers and
manufacturers were reluctant to participate in third-party controlled
marketplaces. In other words, the problem with third-party Web exchanges
is that they interfere with the relationships between suppliers
and customers, said Peter Berghammer, chief executive officer of
Copernio, an electronic-commerce technology firm.
“The premise of e-business is to create competition and lower
prices,” he said. But that is a flawed model, he asserted,
because it assumes that price is the only thing that matters.
In the defense and aerospace industries, the B2B exchanges have
found that suppliers have not been so eager to engage in bidding
wars, because those auctions do not take into account factors other
than price, such as quality, safety or reliability.
“It’s been difficult to get sellers to participate,”
he said. “They are afraid to turn over proprietary information
and to have prices artificially come down.”
Public exchanges, said Berghammer, have yet to address how to protect
suppliers’ proprietary data, such as price lists and customer
names, links into inventory, documentation and certification systems.
That is a “big psychological inhibitor,” which has resulted
in a much lower level of participation in B2B electronic marketplaces
than had been anticipated.
One drawback of virtual procurement is that “screening is
tough,” he said. “There are a lot of bottom feeders
who speculate on parts.”
In the aviation industry, where Berghammer spent most of his career,
“people want a trusted source for their parts. With many exchanges,
you have no idea who you are dealing with.”
Companies that do military business, he said, “don’t
trust exchanges, because they themselves are trusted sources. Why
should you attach your credibility to some Johnny-come-lately operation?”
Some companies often would rather spend money internally and control
their customer’s “e-business experience” by developing
their own portals.
That appears to be among the reasons why TRW’s aerospace
division invested $10 million in AeroVantix, an e-business portal
designed for the company’s commercial customers and suppliers.
Rather than focus on generating revenue from the portal, the company
wanted to improve “customer service,” said Arabella
Bijlani, vice president for business improvement at TRW Aeronautical
Systems. “We did not do this because we wanted to make money,”
she said.
“Our goal is not to recoup the $10 million investment through
direct savings,” she told National Defense. “The real
savings will be the customers getting a better service. If the customer
satisfaction ratings go up, it will have paid hands down.”
Many companies that developed portals, she said, “replicated
their current processes. What we tried to do is put the pressure
on ourselves to redesign our processes.” For example, the
portal forced company officials to simplify the procurement system,
“Do we really need 15 approval signatures on a procurement?”
Bijlani asked rhetorically. “We took out 90 percent of the
bureaucracy in the process of developing the portal.”
TRW is open to the possibility of having other companies become
partners in AeroVantix, said Bijlani. “Having other companies
join us would allow us to collaborate with other tier-one companies
and put joint bids together.”
AeroVantix also provides tools for engineering collaboration, which
is a useful service for many companies, she said.
The dot-com B2Bs that have gone out of business, she said, “didn’t
have engineering collaboration engines, didn’t have supply-chain
collaboration engines.”
The demand for digital engineering tools—that allow companies
to collaborate on projects—is growing, particularly in Europe,
said Berghammer.
During the dot-com fever in the United States in the late 1990s,
he said, “we thought we would define e-business for the rest
of the world.” That didn’t work, he explained, because
it was “hype about stuff that didn’t exist. We were
selling vaporware.”
Many of the aerospace and aviation-parts exchanges are like the
Wild West, he said. “I don’t think the shootout for
the lowest price benefits anyone.”
Not Just Transactions
“B2Bs are more than just about transactions,” said Stan
Z. Soloway, president of the Professional Services Council, an information
technology industry association. Electronic marketplaces have “real
potential,” he said, because they represent “a step
up in collaborative relationships” between customers and suppliers.
The shift away from a transaction-only B2B model is being experienced
at Exostar, the aerospace industry’s biggest exchange. Exostar
was launched with great fanfare about a year ago. It is owned by
the world’s largest defense and aerospace firms: Boeing, Lockheed
Martin, Raytheon, BAE Systems and Rolls Royce. The five founders,
which provided the venture capital, sit on the board of directors
and also are customers of Exostar.
Approximately 4,000 companies do business online at Exostar, said
Barry Lerner, vice president for government sales. They conduct
about 20,000 transactions per week, he said. “We’ve
touched 10 percent of the industry.” There are about 40,000
suppliers in the aerospace and defense sector.
Exostar is years away from being profitable, although it does generate
revenue from multiple sources, such as on-line auctions and buy-sell
transaction fees. “We are building the models for a lot of
other industries,” he said.
To boost its competitiveness in the industry, Exostar plans to
launch new products, such as engineering and design networking software
that companies can share when they are collaborating on a weapons
development project, for example. “Our revenue model over
time will be far more than just transaction based,” said Lerner.
“We are still working this out. We are coming out with new
services, which will be our revenue driver.”
Some of the expected new products by Exostar include:
A purchasing system for government buyers, called ProcurePass,
is due out later this year, said Lerner. Another product will be
ForumPass, which is Exostar’s branded name for the widely-used
Windchill ProjectLink engineering collaboration tool.
Users of Exostar pay $1.50 on average per transaction. The exchange
hosts $5 million a week in reverse auctions.
While Exostar is emerging as the top exchange for the defense industry,
it faces tough competition in the commercial aerospace sector from
Cordiem.
Cordiem was formed by the merger of two formerly independent B2B
exchanges, MyAircraft and AirnewCo. Its founders include Air France,
American Airlines, Goodrich Co., British Airways, Continental Airlines,
Delta Air Lines, Honeywell International Inc., Iberia Airlines,
SAirGroup, United Airlines, United Parcel Service and United Technologies
Corp.
Cordiem is focused on commercial aviation, so it does not necessarily
threaten Exostar’s defense-oriented market, said Jim Mandracchia,
Exostar’s chief strategist. “In aerospace and defense,
I don’t think we have any competition that has that much traction.”
The reason for having B2B exchanges, Mandracchia explained, is
to simplify a complicated process. “In aerospace and defense,
we’ve done electronic business for many years,” he said.
“The trouble was that it was done in many different ways.
Each of us was trying to impose a unique approach. There was additional
cost and complexity.”
For the suppliers, it is easier to deal with one procurement system
than to have to learn the systems of each of the five major companies
that own Exostar, said Lerner. He predicted that Exostar will connect
about 250 procurement systems in 20 countries.
Soloway, president of the Professional Services Council, agreed
that exchanges such as Exostar make it easier to deal with large
suppliers such as Boeing, which has 20 different procurement systems.
To earn the trust of the industry’s suppliers, he noted,
exchanges must have a firm set of policies assuring vendors that
the buyers are not using online auctions as an intelligence-gathering
tool, to get pricing information. “If the suppliers feel they
are being compromised, it [the agreement] will fall apart,”
said Soloway.
Government Business
Exostar also is trying to expand its business with the U.S. Defense
Department, said Mandracchia. The challenge in working with the
department is that it is not monolithic, but rather a confederation
of agencies. “We are working with the Department of Defense
to identify a number of pilot projects, across the services,”
he said. One of those projects is to set up a private exchange for
contractors that do business with the Naval Sea Systems Command.
Other pilot programs involve the Naval Inventory Control Point,
the Defense Logistics Agency and the Air Force Materiel Command.
“They have to go through some testing and comfort on their
own,” said Mandracchia.
This month, Exostar was scheduled to announce a partnership with
Parametric Technology Corp., a supplier of enterprise collaboration
software. “We are taking one of their products and fine-tuning
it for our industry,” said Mandracchia. The goal is to develop
software that can support the manufacturing of weapon systems, in
a digital environment that multiple firms can share.
Boeing and Lockheed Martin, for example, each built its own collaborative
engineering system for the Joint Strike Fighter program, to facilitate
the participation of subcontractors from around the world. The downside
to that, said Lerner, was that each partner had to buy expensive
equipment and software in order to participate. Small businesses
often cannot afford such technology, he said. Lerner said he hoped
that Exostar could provide lower-cost software that small firms
can afford.
“Every major Defense Department program often has one of
these environments,” Lerner said. “We’ve done
the same thing about 100 times.”
Many of Exostar’s top executives came from the defense industry.
Mandracchia formerly worked for Lockheed Martin. Lerner came from
Honeywell Corp. Former Exostar chief executive, Andy Plyler, left
Exostar in June, after only five months on the job. Unlike many
of the firm’s executives, Plyler had come to Exostar from
a commercial B2B exchange for aviation spare parts, Partsbase.com.
Even though Exostar said his departure was voluntary, to “pursue
other business opportunities,” industry observers speculated
that he did not fit into the company’s defense-oriented culture
and that Exostar wanted to avoid being associated with the financial
problems experienced by Partsbase.com, which is being sued by investors.
Partsbase.com lost more than $20 million between 1998 and 2000.
How long it will take for Exostar to be profitable is uncertain,
said Mandracchia. “A while. ... I don’t know the exact
answer.”
One advantage that Exostar has over start-ups is that it doesn’t
have to aggressively market itself to unfamiliar industries, he
said. During the heady days of the dot-com e-commerce boom, firms
would spend millions on television advertising. “We don’t
have that problem,” said Mandracchia. “We are built
by the industry, for the industry. We don’t have to spend
millions of dollars building the market like the dot-coms. We will
be profitable much faster than many of those companies, many of
which did not survive.”
The shakeout in the industry is expected to continue, said Berghammer.
“There have been both spectacular failures and a few slow
deaths,” such as Skyfish, AviationX, AeroV and B2Baero, he
said.
Berghammer said that the exchanges more likely to survive are those
that offer specialty services, such as Overhaulsearch.com, which
provides information to the aviation industry on the capabilities
and prices from about 550 overhaul shops, airlines, vendors, manufacturers,
government agencies and leasing companies.
His company, Copernio, recently announced a deal with TradeAir,
an aviation industry exchange, to develop a real-time trading forum
for selling and buying aircraft parts.
“We were tired of dot.com hype,” he said. “That
is not what this business is about.”
Copernio is trying to drum up military business by selling niche
services, such as networks to help logisticians request parts and
avoid cumbersome paperwork. “Someone on the flight line with
a hand-held computer or a cellular phone can input what items he
needs, versus going to the warehouse and filling out forms to request
parts,” Berghammer said. “We can seamlessly do that
without intermediate steps.” Another technology the company
launched is called AOG alert (aircraft on ground). When critical
components are broken, airplanes can’t fly. That costs airlines
millions of dollars a year, he said. The AOG wireless services sends
alerts to the cell phones of selected AOG vendors, notifying them
that there is an emergency and that they need to deliver a specific
part immediately.